Kleiner lawyer Lynne Hermle argued that because Pao signed an arbitration agreement with multiple Kleiner Perkins funds — which are set up as independent managing LLCs, separate from the firm — and the firm also signed two of those agreements, they apply to the dispute.

Pao never signed an arbitration agreement with the firm, only the funds, so linking the two together was crucial.

Judge Harold Kahn ultimately told the firm it could file another motion to arbitrate based on “equitable estoppel and third-party beneficiary,” because the entities are so intertwined.

Initially Kahn disagreed strongly with Hermle, saying that Pao was suing her employer, not the funds — so fund contracts were irrelevant.

That was in keeping with what Kahn said in a tentative ruling yesterday. He also, as promised, granted two motions to keep sensitive documents such as Kleiner partner agreements sealed.

But Hermle, a partner at Orrick, Herrington & Sutcliffe, successfully argued that the managing LLCs are important parties in the case as well.

That’s because the funds where the cash prize lies in venture capital, in shares of profits referred to as “carried interest.”

Pao is seeking damages that include carried interest and promotions that would have given her additional carried interest. And those are forms of compensation and reward that are associated with the funds, not the firm. So including them is clearly in her interest as well.

Outside of court, Hermle described the judge’s decision as “fair,” while Pao lawyer Alan Exelrod declined to comment.

Kleiner later followed up with this statement:

KPCB is encouraged by Judge Kahn’s willingness to hear our arguments on third party beneficiary and equitable estoppel claims. The firm will file its motions by July 13th to be heard in a supplementary hearing on July 20th. KPCB continues to believe it has strong arguments and precedent to move the matter to arbitration. Ms. Pao, like other partners, signed a variety of standard agreements requiring, among other things, that all disputes be resolved through arbitration. We expect arbitration to be a more efficient and speedier dispute resolution process than trying a matter before a jury years down the line in the San Francisco Superior Court.

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